EXCHANGE TRADED

CONTRACT OPTIONS AT
SAXO CAPITAL MARKETS

Contents
Exchange Traded Contract Options at Saxo Capital Markets..................................................................1
Contents...............................................................................................................................................2
Product Features...................................................................................................................................3
1. Tradable instruments...................................................................................................................3
2. Trading platforms........................................................................................................................3
3. Orders supported........................................................................................................................3
4. Exercise & Settlement..................................................................................................................4
5. Expiry..........................................................................................................................................4
6. Transaction costs.........................................................................................................................4
7. Client margin profiles..................................................................................................................5
8. Options Strategies.......................................................................................................................5
Product Benefits....................................................................................................................................7
1. Why trade Contract Options?......................................................................................................6
2. Unique Selling Points of Exchange Traded Contract Options at Saxo Capital Markets...................6
Appendices...........................................................................................................................................7
Appendix 1: Tradable instruments at launch......................................................................................7
Appendix 2: Platform screenshots......................................................................................................8
Appendix 3: Option Introduction.....................................................................................................11
Appendix 4: Option Basis................................................................................................................14
Appendice 5: Options Glossary........................................................................................................33

Product Features

1.

Tradable instruments

All Exchange Traded Contract Option instruments are listed on an exchange and there is no market-making or
matching of client trades and orders. The full list of instruments and exchanges on which they trade can be seen
in the table in appendix 1, but below there is a summary of the key contracts available and their product groups.
Product Groups

Key Contracts

Agriculture

Corn, Soybean, Wheat, Cattle,

Energy

Crude Oil, Natural Gas, ...

Equity Index

DAX, EUROSTOXX, FTSE, CAC, SMI, AEX,

S&P 500, ASX,

FX

EUR/USD, ...

Interest Rates

STIRs (EuriBor, Sterling, )

Treasuries, Gilt, Bund, Bobl & Schatz,

Metals

Gold, Silver,

Volatility

VIX, ...

These instruments are listed on the following exchanges:

-
-
-
-
-
-
-
-
-
-

ASX/SFE
CBOT
CME
COMEX
EUREX
EURONEXT Ams
EURONEXT Liffe
EURONEXT Paris
NYMEX
US Option

2.

Trading platforms

Exchange Traded Contract Options will be tradable from an industry-standard options chain in the ClientStation
(SaxoTrader) and the SaxoWebTrader. There will be no options chain in the SaxoMobileTrader but you will be able
to close positions from SaxoMobileTrader. See the screenshots in appendix 2 of the options chain and order ticket.

3.

Orders supported

Limit, Stop and Market orders will be supported. Both One-Cancels-Other (OCO) and Good-Till-Canceled (GTC)
parameters are available.

4.

Exercise & Settlement

Saxo Capital Markets will be offering two types of option as defined by the exchange where a Exchange Traded
Contract Option is listed. American style options can be exercised at any time before the expiry, while European
style options can only be exercised at expiry.
Options can be exercised online from the trading platforms or are auto-exercised at expiry. In-the-Money (ITM),
Contract Options on Futures (American style) are settled into a new Futures position, European-style Contract
Options on Stock Indices (ITM) are cash settled into the trading balance at expiry.

5. Expiry
All positions are subject to an Auto-Exercise procedure at expiry:

All long positions on In-the-Money options are assumed to be exercised.

All short positions on In-the-Money options are assumed to be assigned.
All positions on Out-of-the-Money options are abandoned.

A Call Option is In-the-Money when the strike price is below the market price of the underlying asset.
A Put Option is In-the-Money when the strike price is above the market price of the underlying asset
Abandonment of In-the-Money positions is not supported.
Thus, clients should close their option positions prior to expiry.

6.

Transaction costs

The existing monthly volume-based pricing for standard Futures contracts will be adopted for Contract Options.
1) Price shown on websites:
a) Publicly available pricing on the websites go up to 5,000 lots a month.
b) Above 5,000 lots, clients will be encouraged to engage their Private Account Manager to negotiate
commission levels, based on the volume they offer.
2) Minimum ticket fees:
a) Exchange Traded Options will not be subject to minimum tickets
Currency

Trade Volume: Contracts / Month

0 - 250

251 - 1.000

1.001 - 5.000

AUD

10.00

5.00

2.50

EUR

6.00

3.00

1.50

GBP

5.00

2.50

1.25

SGD

15.00

7.50

3.75

USD

6.00

3.00

1.50

CHF

8.00

4.00

2.00

JPY

1000.00

800.00

750.00

SEK

75.00

40.00

20.00

CAD

6.00

3.00

1.50

HKD

45.00

30.00

20.00

7.

Client margin profiles

Saxo Capital Markets will operate with two margin profiles:

A basic profile by default which enables clients to buy options only puts and/or calls.
An advanced profile for individually assessed clients which enables the client to do the same as the basic
profile and to write (sell/short) options and receive margin benefits on option strategies (combinations of
options and/or underlying positions).

In case of a margin breach and stop-out is triggered, all option positions including Bought / Long Contract
Options will be closed.

8.

Options Strategies

There will not, in this launch, be any automated execution of the separate legs of trading strategies. Clients
wishing to trade strategies will need to execute the legs themselves via the platforms. For more details on options
strategies, please refer to appendices 3 & 4.

Product Benefits
1.

Why trade Exchange Traded Contract Options?

2.

leveraged directional plays with a known loss potential,

volatility plays either positioning for a directional change in volatility or for no change in volatility,
portfolio hedging,
revenue enhancement on a portfolio writing options against a portfolio and keeping the premium.

Unique Selling Points of Contract Options at Saxo Capital Markets

1. Saxo Capital Markets Exchange Traded Contract Options will be part of Saxo Capital Markets
multi-asset offering, which means:

You will be able to use stocks and bonds as collateral. Remember it is free to hold a stock portfolio at
Saxo.
Portfolio hedging and enhancement strategies will be possible on portfolios of Saxos existing asset
classes.

2. Saxo Capital Markets will not charge a minimum ticket fee or carrying cost

Some ETO brokers charge clients a minimum ticket fee and charge for holding positions overnight in
addition to the trading cost. Saxo will not charge either.

3. Saxo Capital Markets will not charge for the use of its software (trading platforms)

Some ETO brokers charge clients for using their trading platforms. You will not be charged additional fees
to use Saxos ClientStation (SaxoTrader) and SaxoWebTrader platforms.

4. Saxo Capital Markets multi-language service and support

Saxo is renowned for its high service levels in many languages and, in many cases, with a true local
presence. Some Listed Options brokers have a perceived weakness in their service levels.

5. Online exercise of options

Some Listed Options brokers require clients wishing to exercise options before expiry to do so manually
by telephone. Saxo will offer online exercise in addition to manual exercise.

Appendices
Appendix 1: Tradable instruments at launch
CODE

UNDERLYING

DESCRIPTION

EXCHANGE

OZC

Corn

Options on the Corn Future

CME

OZS

Soybeans

Options on the Soybeans Future

CME

OZW

Wheat

Options on the Wheat Future

CME

LE

Live Cattle

Options on the Live Cattle Future

CME

ES

E-mini S&P 500

Options on the E-mini S&P 500 Future

CME

GE

Eurodollar

Options on the Eurodollar Future

CME

OZQ

30-Day Federal Funds

Options on the 30-day Federal Funds Future

CBOT

OZB

U.S. Treasury Bond

Options on the U.S. Treasury Future

CBOT

OZF

5-Year U.S. Treasury Note

Options on the 5-Year U.S. Treasury Note Future

CBOT

OZN

10-Year U.S. Treasury Note

Options on the 10-Year U.S. Treasury Note Future

CBOT

OG

Gold

Options on the Gold Future

COMEX

SO

Silver

Options on the Silver Future

COMEX

LO

Ligth Sweet Crude Oil

Options on the Light Sweet Crude Oil Future

NYMEX

ON

Henry Hub Natural Gas

Options on the Natural Hub Natural Gas Future

NYMEX

RUT

Russell 2000

Options on the Russell 2000 Index (European)

US Option

SPX

S&P 500

Options on the S&P 500 Index (European)

US Option

VIX

VIX

Options on the VIX Index (European)

US Option

OGBM

BOBL

Options on the BOBL Future

EUREX

OGBL

BUND

Options on the BUND Future

EUREX

OGBS

SCHATZ

Options on the SCHATZ Future

EUREX

ODAX

DAX

Options on the DAX Index (European)

EUREX

OESX

DJ Euro Stoxx 50

Options on the DJ Euro Stoxx 50 Index (European) EUREX

OSMI

SMI

Options on the SMI Index (European)

EUREX

AEX

AEX

Options on the AEX Index (European)

Euronext Ams

PXA

CAC 40

Options on the CAC 40 Index (European)

Euronext Paris

ESX

FTSE 100

Options on the FTSE 100 Index (European)

Euronext LIFFE

3m Euribor

Options on the Short Euribor Future

Euronext LIFFE

3m Sterling

Options on the Short Sterling Future

Euronext LIFFE

XJO

S&P ASX 200

Options on the S&P ASX 200 Index (European)

ASX

AP

ASX SPI 200

Option on the ASX SPI 200 Future

ASX/SFE

Appendix 2: Platform screenshots

ClientStation Option Chain

SaxoWebTrader Option Chain

Order ticket, ClientStation and SaxoWebTrader, Exercise module

10

Appendix 3: Option Introduction

Definition
An option is a contract between two parties in which the option buyer (holder) purchases the right (but not the
obligation) to buy/sell an underlying (Index, Stock, Commodity, Currency) at a predetermined price from/to the
option seller (writer) within a fixed period of time.
Option Contract Specifications
The following terms are specified in an option contract:
The two classes of options are puts and calls. Call options confer the buyer the right to buy the underlying asset
while put options give him the rights to sell them.
Strike Price, Option Premium & Moneyness
When selecting options to buy or sell, for options expiring on the same month, the options price (premium) and
moneyness depends on the options strike price.
Strike Price
The strike price is the price at which the underlying asset is to be bought or sold when the option is exercised.
Its relation to the market value of the underlying asset affects the moneyness of the option and is a major
determinant of the options premium.
Definition:
The strike price is defined as the price at which the holder of an option can buy (in the case of a call option) or
sell (in the case of a put option) the underlying when the option is exercised. Hence, strike price is also known as
exercise price.
Relationship between Strike Price & Call Option Price
For call options, the higher the strike price, the cheaper the option. The following table lists option premium
typical for near term call options at various strike prices when the underlying is trading at 50.
Strike Price

Moneyness

Call Option
Premium

Intrinsic Value

Time Value

35

ITM

15.50

15

0.50

40

ITM

11.25

10

1.25

45

ITM

50

ATM

4.50

4.50

55

OTM

2.50

2.50

60

OTM

1.50

1.50

65

OTM

0.75

0.75

11

Relationship between Strike Price & Put Option Price

Conversely, for put options, the higher the strike price, the more expensive the option. The following table lists
option premium typical for near term put options at various strike prices when the underlying is trading 50
Strike Price

Moneyness

Put Option
Premium

Intrinsic Value

Time Value

35

OTM

0.75

0.75

40

OTM

1.50

1.50

45

OTM

2.50

2.50

50

ATM

4.50

4.50

55

ITM

60

ITM

11.25

10

1.25

65

ITM

15.50

15

0.50

OptionsPremium
In exchange for the rights conferred by the option, the option buyer has to pay the option seller a premium for
carrying on the risk that comes with the obligation. The option premium depends on the strike price, volatility of
underlying, as well as the time remaining to expiration. There are two components to the options premium, the
intrinsic value and the time value.
Intrinsic Value
The intrinsic value is determined by the difference between the current trading price and the strike price. Only in
the money options have intrinsic value. Intrinsic value can be computed for in-the-money options by taking the
difference between the strike price and the current trading price. Out-of-the-money options have no intrinsic
value.
Time Value
An options time value is dependent upon the length of time remaining to exercise the option, the moneyness of
the option, as well as the volatility of the underlying securitys market price.
The time value of an option decreases as its expiration date approaches and becomes worthless after the date.
This phenomenon is known as time decay. As such, options are also wasting assets.
For in-the-money options, time value can be calculated by subtracting the intrinsic value from the option price.
Time value decreases as the option goes deeper into the money. For out-of-the-money options, since there is zero
intrinsic value, time value = option price.
Typically, higher volatility gives rise to higher time value. In general, time value increases as the uncertainty of the
options value at expiry increases.
Effect of Dividends on Time Value
Time value of call options on high cash dividend stocks can get discounted while similarly, time value of put
option can get inflated.
Moneyness
Moneyness is a term describing the relationship between the strike price of an option and the current trading
price of its underlying. In options trading, terms such as in-the-money, at-the-money and out-of-the money
describe the moneyness of options.

12

At-the-Money (ATM)
An at-the-money option is a call or put option that has a strike price that is equal to the market price of the
underlying asset. While the premiums for at-the-money options are relatively lower than in-the-money options,
it possesses no intrinsic value and contains only time value which is greatly influenced by the volatility of the
underlying and the passage of time.
Often, it is not easy to find an option with a strike price that is exactly equal to the market price of the underlying.
Hence, close to the money or near to the money options are bought or sold instead.
In-the-Money (ITM)
A call option is in-the-money when its exercise price is below the current trading price of the underlying asset. A
put option is in-the-money when its exercise price is above the current trading price of the underlying asset.
In-the-money options possess significant intrinsic value and are generally more expensive.
Out-the-Money (OTM)
Calls are out-of-the money when their strike price is above the market price of the underlying asset. Put options
are out-the-money when their strike price is below the market price of the underlying asset.
Out-the-money options have zero intrinsic value and possess greater likelihood of expiring worthless, aspects
which make them relatively cheaper.
Expiration Date
Option contract are wasting assets and all options expire after a period of time. Once the option expires, the right
to exercise no longer exists and the option becomes worthless. The expiration month is specified for each option
contract. The specific date on which expiration occurs depends on the type of option. For instance, index options
listed on Eurex expire on the third Friday of the expiration month.
Option style
An option contract can be either American style or European style. The manner in which options can be exercised
also depends on the style of the option. American style options can be exercised anytime before expiration while
European style options can only be exercise on expiration date itself.
Underlying Asset
The underlying asset is the security which the option seller has the obligation to deliver to or purchase from the
option holder in the event the option is exercised. In case of stock options, the underlying asset refers to the
shares of a specific company. Options are also available for other types of securities such as currencies, indices and
commodities.
Contract Multiplier
The contract multiplier states the quantity of the underlying asset that needs to be delivered in the event the
option is exercised. For stocks options, in general each contract covers 100 shares.
The Option Market
Participants in the options market buy and sell call and put options. Those who buy options are called holders.
Sellers of options are called writers. Option holders are said to have long positions, and writers are said to have
short positions.

13

Appendix 4: Option Basis

An Investor can use options to achieve a number of different things depending on the strategy the investor
employs.
Novice option traders will be allowed to buy calls and puts, to anticipate rising as well as falling markets.
Example:

Buying Call or Long Call

The long call option strategy is the most basic option trading strategy whereby the options trader buys call options
with the belief that the price of the underlying will rise significantly beyond the strike price before the expiration
date.

Leverage:
Compared to buying the underlying outright, the call option buyer is able to gain leverage since the lower priced
calls appreciate in value faster percentagewise for every point rise in the price of the underlying.
However, call options have a limited lifespan. If the underlying stock price does not move above the strike price
before the option expiration date, the call option will expire worthless.

Unlimited Profit Potential

Since they can be no limit as to how the stock price can be at expiration date, there is no limit to the maximum
profit possible when implementing the long call option strategy.
The formula for calculating profit is given below:

14

. Maximum profit = Unlimited

. Profit Achieved When Price of Underlying >=Strike Price of Long Call + Premium Paid

. Profit = Price of underlying Strike Price of Long Call Premium Paid

Limited risk
Risk for the long call options strategy is limited to the price paid for the call option no matter how low the stock
price is trading on expiration date.
The formula for calculating maximum loss is given below:

. Max Loss = Premium Paid + Commissions Paid

. Max Loss Occurs when Price of Underlying <= Strike Price of Long Call

Breakeven Point
The underlie price at which breakeven is achieved for the long call position can be calculated using the following
formula.

. Breakeven Point = Strike Price of Long Call + Premium Paid

15

Long Put
The long put option strategy is a basic strategy in options trading where the investor buy put options with the
belief that the price of the underlying will go significantly below the striking price before the expiration date.
Compared to short selling the underlying, it is more convenient to bet against an underlying by purchasing put
options. The risk is capped to the premium paid for the put options, as opposed to unlimited risk when short
selling the underlying outright.

Unlimited Potential
Since stock price in theory can reach zero at expiration date, the maximum profit possible when using the long
put strategy is only limited to the striking price of the purchased put less the price paid for the option.
The formula for calculating profit is given below:

. Maximum Profit = Unlimited

. Profit Achieved when Price of Underlying = 0

. Profit = Strike Price of Long Put Premium Paid

Limited risk
Risk for implementing the long put strategy is limited to the price paid for the put option no matter how high the
underlying price is trading on expiration date.
The formula for calculating maximum loss is given below:

. Max Loss = Premium Paid + Commissions Paid

. Max Loss Occurs When Price of Underlying >= Strike Price of Long Put

Breakeven Point
The underlier price at which breakeven is achieved for the long put position can be calculated using the following
formula.

16

. Breakeven Point = Strike Price of Long Put Premium Paid

Covered calls
The covered call is a strategy in options trading whereby call options are written against a holding of the
underlying security.
Covered Call (OTM) construction
Long Underlying
Sell 1 Call
Using the covered call option strategy, the investor gets to earn a premium writing calls while at the same time
appreciate all benefits of underlying stock ownership, such as dividends and voting rights, unless he is assigned an
exercise notice on the written call and is obliged to sell his shares.
However, the profit potential of covered call writing is limited as the investor had, in return for the premium, given
up the chance to fully profit from a substantial rise in the price of the underlying asset.

Out-of-the-money Covered Call

This is a covered call strategy where the moderately bullish investor sells out-of-the-money calls against a holding
of the underlying shares. The OTM covered call is a popular strategy as the investor gets to collect premium while
being able to enjoy capital gains if the underlying stock rallies.

Limited Profit Potential

In addition to the premium received for writing the call, the OTM covered call strategys profit also includes gain if
the underlying stock price rises, up to the strike price of the call option sold.
The formula for calculating maximum profit is given below:

. Max Profit = Premium received Purchase Price of the Underlying + Strike Price of Short Call
Commissions Paid

. Max Profit Achieved when Price of Underlying>= strike Price of Short Call
17

Unlimited Loss Potential

Potential losses for this strategy can be very large and occurs when the price of the underlying falls. However, this
risk is no different from that which the typical stockowner is exposed to. In fact, the covered call writers loss is
cushioned slightly by the premiums received for writing the calls.
The formula for calculating loss is given below:

. Maximum loss = Unlimited

. Loss Occurs When Price of Underlying < Purchase Price of Underlying Premium received

. Loss = Purchase Price of Underlying Price of Underlying Max Profit + Commissions Paid

Breakeven Points
The underlier price at which breakeven is achieved for the covered call (OTM) position can be calculated using the
following formula.

18

. Breakeven Point = Purchase Price of Underlying Premium Received

Bull Call Spread

The Bull Call Spread option trading is employed when the options trader thinks that the price of the underlying
asset will go up moderately in the near term.
Bull call spreads can be implemented by buying an at-the-money call option while simultaneously writing a higher
striking out-of-the-money call option of the same underlying and the same expiration month.
Bull Call Spread Construction
Buy 1 ATM Call
Sell 1 OTM Call
By shorting the-out-of-the-money call, the options trader reduces the cost of establishing the bullish position but
forgoes the chance of making a large profit in the event that the underlying asset price skyrockets.

Limited Upside Profits

Maximum gain is reached for the bull call spread options strategy when the underlying price move above the
higher strike price of the two calls and its equal to the difference between the price strike of the two call options
minus the initial debit taken to enter the position.
The formula for calculating maximum profit is given below:

. Max Profit = Strike Price of Short Call Strike Price of Long Call Net Premium Paid
Commissions Paid

. Max Profit Achieved When Price of Underlying >= Strike Price of Short Call

19

Limited Downside Risk

The bull call spread strategy will result in a loss if the underlying price declines at expiration. Maximum loss cannot
be more than the initial debit taken to enter the spread position.
The formula for calculating maximum loss is given below:

. Max Loss = Net Premium Paid + Commissions Paid

. Max Loss Occurs When Price of Underlying <= Strike Price of Long Call

Breakeven Point
The underlier price at which breakeven is achieved for the bull call spread position can be calculated using the
following formula.

20

. Breakeven Point = Strike Price of Long Call + Net Premium Paid

Bear Put Spread

The bear put spread option strategy is employed when the options trader thinks that the price of the underlying
asset will go down moderately in the near term.
Bear put spread can be implemented by buying a higher striking in-the-money put option and selling a lower
striking out-of-the-money put option of the same underlying security with the same expiration date.
Bear Put Spread Construction
Buy 1 ITM Put
Sell 1 OTM Put
By shorting the out-of-the-money put, the options trader reduces the cost of establishing the bearish position but
forgoes the chance of making a large profit in the event that the underlying asset price plummets.

Limited Downside Profit

To reach maximum profit, the underling needs to close below the strike price of the out-of-the-money put on the
expiration date. Both options expire in the money but the higher strike put that was purchased will have higher
intrinsic value than the lower strike put that was sold. Thus, maximum profit for the bear put spread option
strategy is equal to the difference in strike price minus the debit taken when the position was entered.
The formula for calculating maximum profit is given below:

. Max profit = Strike Price of Long Put Strike Price of Short Put Net Premium Paid
Commissions

. Max Profit Achieved When Price of Underlying <= Strike Price of Short Put

Limited Upside Risk

If the stock price rise above the in-the-money put option strike price at the expiration date, then the bear put
spread strategy suffers a maximum loss equal to the debit taken when putting on the trade.

. Max Loss = Net Premium Paid + Commissions Paid

. Max Loss Occurs when Price of Underlying >= Strike Price of Long Put

Breakeven Point
The underlier price at which breakeven is achieved for the bear put spread position can be calculated using the
following formula.

. Breakeven Point = Strike Price of Long Put Net Premium Paid

21

Risk Reversal
A risk reversal is an option strategy that is constructed by holding the underlying asset while simultaneously
buying protective puts and selling call options against the holding. The puts and the calls are both out-of-themoney options having the same expiration month and must be equal in number of contracts.
Risk Reversal Strategy Construction
Long underlying
Sell 1 OTM Call
Buy 1 OTM Put
Technically, the Risk reversal Strategy is the equivalent of an out-of-the-money covered call strategy with the
purchase of an additional protective put.
The Risk Reversal Strategy is a good strategy to use if the options trader is writing covered call to earn premium
but wish to protect himself from an unexpected sharp drop in the price of the underlying asset.

Limited Profit Potential

The formula for calculating maximum profit is given below:

. Max Profit = Strike Price of Short Call Purchase Price of Underlying + Net Premium Received
Commissions Paid

22

. Max Profit Achieved When Price of Underlying >= Strike Price of Short Call

Limited Risk
The formula for calculating maximum loss is given below:

. Max Loss = Purchase Price of Underlying Strike Price of Long Put Net Premium Received +
Commissions Paid.

. Max Loss Occurs When Price of Underlying <= Strike Price of Long Put

Breakeven Point
The underlier price at which breakeven is achieved for the risk reversal strategy position can be calculated using
the following formula.

. Breakeven Point = Purchase Price of Underlying + Net Premium Paid

23

Long strangle
The Long strangle, is a neutral strategy in options trading that involve the simultaneous buying of a slightly out-ofthe-money put and a slightly out-of-the-money call of the same underlying asset and expiration date.

Long Strangle Construction

Buy 1 OTM Call
Buy 1 OTM Put

The long options strangle is an unlimited profit, limited risk strategy that is taken when the options trader thinks
that the underlying stock will experience significant volatility in the near term. Long strangles are debit spreads as
a net debit is taken to enter the trade.

Unlimited Profit Potential

A large gain for the long strangle option strategy is attainable when the underlying stock price makes a very
strong move either upwards or downwards at expiration.
The formula for calculating profit is given below:

. Maximum Profit Unlimited

. Profit Achieved When Price of Underlying > Strike Price of Long Call + Net Premium Paid or Price
of Underlying < strike Price of Long Put Net Premium Paid

. Profit = Price of Underlying Strike Price of Long Call Net Premium Paid or Strike Price of Long
Put Price of Underlying Net Premium Paid

24

Limited Risk
Maximum loss for the long strangle options strategy is hit when the underlying stock price on expiration date
is trading between the strike prices of the options bought. At this price, both options expire worthless and the
options trader loses the entire initial debit taken to enter the trade.
The formula for calculating maximum loss is given below:
. Max Loss = Net Premium Paid + Commissions Paid
. Max Loss Occurs When Price of Underlying is in between Strike Price of Long Call and Strike Price of
Long Put

Breakeven Points
There are 2 breakeven points for the long strangle position: The breakeven points can be calculated using the
following formulae:

. Upper Breakeven Point = Strike Price of Long Call + Net Premium Paid

. Lower Breakeven Point = Strike Price of Long Put Net Premium Paid

25

Long straddle
The Long straddle is a neutral strategy in options trading that involve the simultaneously buying of a put and a call
of the same underlying asset, striking price and expiration date.

Long straddle construction

Buy 1 ATM Call
Buy 1 ATM Put
Long straddle options are unlimited profit, limited risk options trading strategies that are used when the options
trader thinks that the underlying asset will experience significant volatility in the near term.

Unlimited Profit Potential

By having long positions in both call and put options, straddle can achieve large profits no matter which way the
underlying stock price heads, provided the move is strong enough.
The formula for calculating profit is given below:

. Maximum Profit = Unlimited

. Profit Achieved When Price of underlying > strike Price of Long Call + Net Premium Paid or Price
of Underlying< Strike price of Long Put Net Premium Paid

. Profit = Price of Underlying Strike Price of Long Call Net Premium Paid or strike Price of Long
Put Price of Underlying Net Premium Paid

26

Limited Risk
Maximum loss for long straddles occurs when the underlying stock price on expiration date is trading at the strike
price of the options bought. At this price, both options expire worthless and the options trader loses the entire
initial debit taken to enter the trade.
The formula for calculating maximum loss is given below:

. Max loss = Premium Paid + Commissions Paid

. Max Loss Occurs when Price of Underlying = Strike Price of Long Call/Put

Breakeven Points
There are 2 breakeven points for the long straddle position. The breakeven points can be calculated using the
following formulae:

. Upper Breakeven Point = Strike Price of Long Call + Net Premium

. Lower Breakeven Point = Strike Price of Long Put Net Premium Paid

27

Naked Call Writing

The naked call write is a risky options trading strategy where the options trader sells calls against stock which he
does not own. Also known as uncovered call writing.
The out-of-the-money naked call strategy involves writing out-of-the money call options without owning the
underlying stock. It is a premium collection options strategy employed when one is neutral to mildly bearish on
the underlying.

Limited Profit Potential

Maximum gain is limited and is equal to the premium collected for selling the call options.
The formula for calculating maximum profit is given below:

Max Profit = Premium received Commissions Paid

Max Profit Achieved When Price of Underlying <= Strike Price of Short Call

Unlimited Loss Potential

If the underlying price goes up dramatically at expiration, the out-of-the-money naked call writer will be required
to satisfy the options requirements to sell the obligated underlying to the options holder at the lower price buying
the underlying from the open market price. Since there is no limit to how high the underlying price can be at
expiration, maximum potential losses for writing out-of-the-money naked calls is therefore theoretically unlimited.
The formula for calculating loss is given below:

Maximum Loss = Unlimited

Loss Occurs When Price of Underlying > Strike Price of Short Call + Premium Received

Loss = Price of Underlying Strike price of Short Call Premium Received + Commissions Paid

Breakeven Point
The underlier price at which break-even is achieved for the naked call (OTM) position can be calculated using the
following formula.

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Breakeven Point = Strike Price of Short Call +Premium Received

Uncovered Put write

Writing uncovered puts is an options trading strategy involving the selling of put options without shorting the
obligated underlying. Also known as naked put write or cash secured put, this is a bullish options strategy that is
executed to earn a consistent profits by ongoing collection of premium.

Uncovered Put Write Construction

Sell 1 ATM Put

Limited profits with no upside risk

Profit for the uncovered put write is limited to the premiums received for the options sold.
The naked put writer sells slightly out-of-the-money puts month after month, collecting premiums as long as the
stock price of the underlying remains above the put strike price at expiration.
Max Profit = Premium received Commissions Paid
Max Profit Achieved when Price of Underlying >= Strike Price of short Put
Unlimited downside risk with little downside protection
While the premium collected can cushion a slight drop in the underlying price, loss resulting from a catastrophic
drop in the price of the underlying can be huge.
The formula for calculating loss is given below:
Maximum Loss = Unlimited
Loss Occurs When Price of Underlying < Strike Price of Short Put Premium Received
Loss = Strike Price of Short Put Price of Underlying Premium received + Commissions Paid
Breakeven Point
The underlier price at which breakeven is achieved for the uncovered put write position can be calculated using
the following formula.
Breakeven Point = Strike Price of Short Put Premium Received
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Short straddle
The short straddle or naked straddle sale is a neutral options strategy that involve the simultaneous selling of a put
and a call of the same underlying stock, striking price and expiration date.
Short straddles are limited profit, unlimited risk options trading strategies that are used when the options trader
thinks that the underlying securities will experience little volatility in the near term.

Short Straddle Construction

Sell 1 ATM Call
Sell 1 ATM Put

Limited Profit
Maximum profit for the short straddle is achieved when the underlying stock price on expiration date is trading
at the strike price of the options sold. At this price, both options expire worthless and the options trader gets to
keep the entire initial credit taken as profit.
The formula for calculating maximum profit is given below:

Max Profit = Net Premium Received

Max Profit Achieved When Price of Underlying = Strike Price of Short Call/Put

Unlimited Risk
Large losses for the short straddle can be incurred when the underlying price makes a strong move either upwards
or downwards at expiration, causing the short call or the short put to expire deep in the money.
The formula for calculating loss is given below:

Maximum Loss = Unlimited

Loss Occurs when Price of Underlying > Strike Price of Short call + Net premium received or
Price of underlying < Strike Price of Short put Premium received.

Breakeven Points
There are 2 breakeven points for the short straddle position. The breakeven points can be calculated using the
following formulae.

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Upper Breakeven Point = Strike Price of Short Call + Net Premium Received

Lower Breakeven Point = Strike Price of Short Put Net Premium Received

Short Strangle
The short strangle, also known as sell strangle, is a neutral strategy in options trading that involve the
simultaneous selling of a slightly out-of-the-money put and a slightly out-of-the-money call of the same
underlying and expiration date.
The short strangle option strategy is a limited profit, unlimited risk options trading strategy that is taken when the
options trader thinks that the underlying stock will experience little volatility in the near term.

Short Strangle Construction

Sell 1 OTM Call
Sell 1 OTM Put

Limited Profit
Maximum Profit for the short strangle occurs when the underlying stock price on expiration date is trading
between the strike prices of the options sold. At this price, both options expire worthless and the options trader
gets to keep the entire initial credit taken as profit.
The formula for calculating maximum profit is given below:

Max Profit = Net Premium Received

Max Profit Achieved When Price of underlying is in between the Strike Price of the Short Call
and the Strike Price of the Short Put

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Unlimited Risk
Large losses for the short strangle can be experienced when the underlying stock price makes a strong move
either upwards or downwards at expiration.
The formula for calculating loss is given below:

Maximum Loss = Unlimited

Loss Occurs When Price of underlying > Strike Price of short Call + Net Premium Received or
Price of Underlying < Strike Price of Short Put Net Premium Received

Loss = Price of Underlying strike Price of Short Call Net Premium received or Strike Price of
short Put Price of Underlying Net Premium Received

Breakeven Points
There are 2 breakeven points for the short strangle position. The breakeven points can be calculated using the
following formulae.

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Upper Breakeven Point = Strike Price of Short Call + Net Premium Received

Lower Breakeven Point = Strike Price of Short Put Net Premium Received

Appendice 5: Options Glossary

American Option:
An option that can be exercised, at the holders choice, at any time until the option expires.
Assignment:
The obligation incumbent on an option seller to fulfill his contractual requirements (purchase or sale of underlying
instrument), in response to a buyers decision to exercise an option.
At the money:
An option is at the money when the value of the underlying instrument is the same or almost the same as the
strike price of the option contract.
Beta:
A measure of the sensitivity of an asset X to a benchmark index Y.
Call:
An option contract granting the holder the right to buy the underlying asset at the agreed strike price. A call
obliges the writer too sell the underlying at the agreed strike price if he is assigned against.
Cash settlement:
Cash settlement is equivalent to a final margin call on the maturity date. Exercise give rise to the payment of:
Call options: the difference between the closing settlement price and the call option strike price.
Put options: the difference between the put option strike price and the closing settlement price.
Class (of options):
A set of traded options of the same category (American or European) within the same maturity range (short-term
or long-term) and pertaining to the same instrument.
Clearing house:
An organization that registers transactions and provides members with a guarantee of final settlement.
Closing Index:
The last index calculated and published when the markets close, used as the basis of margin calculation.
Closing settlement price/Delivery settlement price:
Computed on the expiration date (options) or the last day of trading (futures), the closing settlement price is the
reference price for expiring options and for final payment of variation margin on futures.
Contract size/Multiplier:
The amount of the underlying asset in an option or future contract.
Contract value:
Obtained by multiplying the premiums quoted price by the contract size (multiple).
Cross-margining:
A facility whereby initial margin is computed on the basis of a portfolio comprising either options and futures
on the same product (option cross-margining) or several contacts (inter contract cross-margining). A portfolio
is sometimes exposed to risk from diverging market movements: cross-margining captures this fact, making it
possible to reduce initial risk.
Daily price limit:
The maximum permitted price movement relative to the previous daily settlement set by the market operator.
When the daily price limit is reached, trading can be suspended, a new price limit is set, variation margin is called
and trading resumes.
Daily settlement price:
Computed and disseminated each trading day, the daily settlement price is used to determine variation margin for
futures contracts and fluctuation limits for the following trading day. It is also used as a reference for early exercise
of American equity options.

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Delta:
A measure of how much an options price will vary for a change in the price of the underlying. Delta ranges from
0 to 1 for call options, and between -1 and 0 for put options.
European option:
An option that can be exercised by the buyer only on the contract expiration date.
Exercise:
A decision, reserved for the option holder, to request execution of the contract.
Expiration date:
The day on which an option contract expires, or the last trading day for a futures contract.
Futures/Futures contract:
A legally binding agreement between a buyer and a seller on a market for derivative financial instruments.
Contract specifications are standardized. They include a firm and final price for payment and, where
appropriate, delivery of the underlying asset at a fixed date in future.
In the money:
A call option is in the money when the market price of the underlying is above the option strike price. A put
option is in the money when the strike price is above the market price of the underlying.
Initial margin:
Initial payment paid by members to the clearing house and by clients to clearing house members to open a
futures position or to write options. Initial margin covers the risk of default and is adjusted daily by calls for
variation margin.
Option:
An option gives the buyer (holder) the right, but not the obligation, to buy (in the case of a call option) or sell (in
the case of a put option) a set quantity of the underlying asset at a specified price (strike price) for a given period
of time.
Out of the money:
A call option is out of the money when the market price of the underlying is below the option strike price. A put
option is out of the money when its strike price is below the market price of the underlying.
Premium:
The option price resulting from matching of buy and sell orders submitted to the market.
Put:
An option contract granting the purchaser the right to sell the underlying asset at the agreed strike price. A put
obliges the seller to purchase the underlying at the agreed strike price if he is assigned against.
Series (of options)
All options of the same class, the same type (call or put) bearing on the same quantity of the underlying
instrument, and having the same strike price and the same expiration date.
Strike price/Exercise price:
The price at which the option holder may purchase (in the case of a call) or sell (in the case of a put) the
underlying asset.
Underlying/Underlying asset:
The asset on which a futures or option contract is based.
Variation margin:
At the end of each trading day, traders positions are marked to market on the basis of the daily settlement price,
thereby producing a potential loss or gain that is paid into the account or collected from it.

Risk warning:
You should carefully consider whether trading in leveraged products is appropriate for you based on your financial circumstances. You should
be aware that dealing in products that are highly leveraged carry significantly greater risk than non-geared investments e.g. share trading. As
such, you could gain and lose large amounts of money. You may sustain losses in excess of the monies you initially deposit to maintain any
positions in leveraged products.

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Updated December 2011